The building crisis - global material shortages and soaring demand

A perfect storm of pandemic induced supply chain issues, a boom in home building, a shortage in skilled labour and the Russia-Ukraine conflict is putting record pressure on the domestic building sector. 

Recently, we have seen several national builders shut down. Tasmanian franchise Hotondo Homes, Melbourne-based ABD Group, Gold Coast-based BA Murphy Group, and the construction giant Privium have all fallen victim to the building crisis, to mention a few.  

The pressure is unlikely to ease in 2022 and others may face a similar fate. The building sector is bracing for the worst, with costs set to keep rising until 2023 as supply chain problems continue.

The main constraints to the construction industry are the supply of labour and building materials. This is causing costs to rise significantly, with a blowout in construction timeframes.

Fixed-price contracts are resulting in builders being unable to finish projects without losing thousands of dollars or renegotiations taking place.

“The cost of building a new home has increased between 15 to 50% in the past six months due to supply chain issues.”

Association of Professional Builders.

Shipping costs have increased up to 200% with rising daily costs of materials such as plasterboard, concrete, steel, and timber. Not only have shipping container rates exponentially increased, but there are also fewer ships coming to Australia which is compounding the building supply crisis.

The critical issues builders are facing

  • Worst materials shortage in 40 years
  • Uncertainty of material importation due to Russia-Ukraine conflict
  • Soaring material costs
  • Labour shortage
  • Industry obsession with fixed-price contracts
  • Unprecedented building demand, fuelled by low interest rates and HomeBuilder stimulus

Whilst the building supply crisis is being mainly caused by global disruptions in production and shipping triggered by the COVID-19 pandemic, at a local level, subcontractors are seeking protections should builders go bankrupt.

From 1 January 2022 new rules were introduced for works more than $10m. For these projects bank accounts must be in established where deposits are held in a trust to pay workers, should the builder be unable to complete the project.

Extending on this ruling from January 2023, the threshold will be lowered to $1m where a project bank account will be required to provide this protection. Those critical of the scheme are seeking the threshold to be lowered to $200k to protect subcontractors on smaller domestic projects.

Looking forward the residential and commercial building outlook into 2022 is for further price increases and product unavailability as the industry continues to look for cost-effective solutions. This is likely to cause a shift in where and how builders source their products. Will that be through different distribution channels or by substituting materials?

What we do know is that in the meantime, delays are expected to continue with an unavoidable escalation in overall construction costs.

Craig McMillan
National Director Commercial VIC
CPV
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